Texts: 3.1 Recently, your firm was appointed as the auditor of Shareware Ltd, a wholesaler of inexpensive eyewear. The company’s financial year ends on 31 March 2022. Peter Lens was also recently promoted to the position of financial manager of Shareware Ltd and has, for the first time, taken on the responsibility for the annual inventory count. He has drafted a memorandum to his staff but has asked you to comment on it before it is distributed to staff.
MEMORANDUM
To: All staff involved in the inventory count
From: Peter Lens
Date: 3 February 2022
Subject: Inventory count
1. The inventory count will take place somewhere between 28 and 31 March 2022. As we expect to be very busy at this time with the receipt and dispatch of the new winter lines of eyewear, we will hope for a quieter day to do the count.
2. The following staff members from the accounting department should count the inventory in the identified section of the warehouse:
- Staff member Style category Section
- John Zungula: fashion north section
- Ian Zulu: sport west section
- Mikel Mancoba: prescription south section
- Rodgers Jojo: novelty east section
This memorandum will be my last official communication concerning the inventory count, but if you wish to discuss any aspect of the count, please see me.
YOU ARE REQUIRED TO:
Describe the audit procedures you will conduct when you attend the inventory count at the end of Shareware Ltd’s financial year? (10 marks)
3.2 3.2.1 When the auditor selects a sample of items in the warehouse and traces them to the inventory count sheets, is he/she testing for valuation, existence, or completeness? Justify your answer? (2 marks)
3.2.2 If the auditor’s risk assessment procedures suggest that internal control in the inventory and production cycle is weak, he/she will:
a. increase his test of controls.
b. increase his substantive tests.
c. perform only analytical procedures.
Justify your choice and explain why you rejected the other options? (6 marks)
3.2.3 To have a sound inventory internal control system, a company must have good internal controls in its acquisitions cycle and its revenue cycle. True or false? Justify. (2 marks)